Gaining confidence, Fed officials eye interest rate hike this year

William Dudley, President of the New York Federal Reserve Bank, speaks at Brooklyn College in the Brooklyn borough of New York, March 7, 2014.Keith Bedford/File Photo

NEW YORK/KNOXVILLE, Tenn. (Reuters) - The Federal Reserve is raising expectations for an interest rate rise this year, even as early as next month, after two policymakers on Tuesday said the economic stars now appear to be aligning despite weak U.S. economic growth in the first half of 2016.

New York Fed President William Dudley said "it's possible" to raise rates at the Sept. 20-21 policy meeting given evidence of wage gains and a tighter labor market that could boost inflation, while Dennis Lockhart of the Atlanta Fed said a hike next month is in play.

The comments, which prompted investors to boost bets on a rate hike, came nine days before the annual meeting of some of the world's top central bankers in Jackson Hole, Wyoming, a venue the Fed often uses to telegraph policy plans.

As June's shock UK vote to leave the European Union fades with little lasting effect on markets, the U.S. economy is bouncing back from a meager 1.0 percent growth rate in the first six months of the year. Employment surged in June and July, while on Tuesday data showed solid gains in industrial output and home building in the world's largest economy.

"We're edging closer towards the point in time where it will be appropriate I think to raise interest rates further," Dudley, a permanent voter on policy and a close ally of Fed Chair Janet Yellen, said on the Fox Business Network.

The central bank raised interest rates from near zero in December last year, its first monetary policy tightening in nearly a decade, but it has since kept its policy rate unchanged amid financial market volatility and stalled economic growth.

Speaking with reporters in Knoxville, Tennessee, Lockhart, a centrist on policy who does not vote on the Federal Open Market Committee this year, said he is not ruling out action in September. "If the meeting were today, I think the economic data would justify a serious discussion" of whether to raise rates now, he said, adding two rate hikes in 2016 is "conceivable."

Dudley's comments were taken as more confident in tone than a speech he gave just two weeks ago. In response, U.S. stock prices slid on Tuesday while interest rate futures markets priced in about an 18 percent chance of a September move by the Fed, up from 9.0 percent on Monday, while odds of a move by December rose to about even.

The Fed also has meetings in early November and in mid-December, which economists see as the most likely timing since it comes after the U.S. presidential election, according a Reuters poll last week.

Lockhart said he was not locked in to a particular date to hike but he cited ongoing job gains and "healthy" signs that inflation will pick up as possibly justifying a September move.

Asked about inflation, which has remained below a 2.0 percent target for years, Dudley said the question is whether there is enough economic growth to push up wages and, ultimately, inflation. "So far we seem to be on that trajectory and we'll have to see how it plays out in coming months," he said.

(This story has been corrected to remove quotations from "in play" in second paragraph)